Conversation with Santi Subotovsky, General Partner of Emergence Capital

Santi! Hey Matthew! How you doing? Good man, it's been a long time. That's it. So we go, we go way back. We met in business school, gosh, you know, over 10 years ago now. Back then you were the crazy entrepreneur, now you're, now you're the, now you're the massively successful VC. How, first of all, how are things, how are things going? How's your family? Is everyone safe and healthy? Thanks for asking. Yeah, it's a long time. It's like that time when I had hair and you were good looking. Actually, you're still good looking, so. Not at all, thank you. But thanks, yeah, things are doing well. We're quarantined now for, for a few months with three young boys and expecting the fourth one or the last one. Oh wow, and trying to see the silver lining of this. We're able to spend a lot of time as a family and learning about each other. So it's like what doesn't kill you makes you stronger. That's our approach to this quarantine. Yeah, and so you've, you, I see the, I see some familiar lava lamps behind us. Did you, did you break into our office to, to, to, to tape this? Of course, it's empty. It's like I need to get away from the kids and all the noise here. So I'm just like squatting in people's offices. Well, I appreciate it. It's good. And make sure to check, check on it. They, and hopefully you can keep the security that's there. Company. So, so back when, you know, when I, when I first met you, you, you were an entrepreneur and you had started a company that was called, I think AHG. What would, tell me a little bit about, about that and what, what was it like being an entrepreneur back then? And why, why'd you, why'd you think, why'd you do the crazy thing of starting a company? Yeah. It's like, I, I didn't grow up saying I was going to be an entrepreneur. I'm more of the accidental entrepreneur. When I graduated from college in Argentina, I couldn't get a job. Argentina was going through financial crisis. And it's like, no, we're going through those here. But in Argentina, it's very typical to go through financial crisis every now and then. So given that I couldn't get a job with my best friend, we said, let's not call ourselves unemployed and let's try to do something. And that's how we started a company. And we didn't know anything about starting companies. There's no venture ecosystem in Argentina. There's no tech ecosystem. So we just stumbled upon the opportunity. We started this company that was an e-learning platform that we were selling in the novel back then software as a service mode. And that's what got us a few customers. We were doing well in Argentina. Then the recession in Argentina got worse and worse. So a lot of our customers said, learning, it's great. We want to train our people, but it's not mission critical like Cloudflare. So we're going to cut our spending. And that's when we hopped into a plane at times where you could fly. And we came to the US and we tried to see if we could sell our software here. And that's what got me here to the US. So before you get to the US, like when you told your family and your parents that you were going to start, you know, you were going to go off and start an e -learning company. What was the reaction of your family or your friends? Were they like, Oh, absolutely. That makes total sense. Or were they, what's e-learning or what is a good job in a bank? Yeah. What's technology? What's an entrepreneur? That's like, that's a fancy way of saying you're unemployed and you're not going to be drawing a salary. You should try to do something different. My family was somewhat in shock, but they knew I was eventually going to do something different. They didn't know I was going to start a company. They didn't know I was going to end up living here in the US in California because growing up in Argentina, the only thing I knew about the US was that you guys had Miami, Orlando with Disney World and New York and then mountains everywhere else. I didn't grow up saying, Oh, I'm going to go to the US and I'm going to study in the US. No mountains as beautiful as the Argentinian mountains. That's fair. That's fair. But this is a beautiful country with a lot more than Miami, Disney World and New York. And I discovered that when I moved here. So it was a challenge. It was a challenge to recruit people and tell them to leave their secure jobs and join a company that had no funding and had no customers. And it's all the labor of love. But some people believed in us and that's what enabled us to grow this business. And eventually we were doing fine. I mean, it's not that we were doing like Cloudflare, but for our standards in Argentina coming from a world where I had no job, I was doing fine. I was like paying my bills. I was like selling software, getting paid. So I thought that that was it until in 2006, I got invited to join a tour with other Endeavor entrepreneurs. Those are entrepreneurs in emerging markets. And we came to California to Silicon Valley and we met a bunch of real entrepreneurs and venture capitalists. And that's when the others should drop for me. And I realized that I had to come here, understand how things work and build something real. But, you know, you say real entrepreneurs, but I mean, I think in a lot of ways, you know, what you are doing is a lot with so much less support system and so much less of a defined playbook. I mean, that actually seems like a much more real entrepreneur entrepreneurial journey to me. And I mean, you were making it up as you were going along. How did you and your co-founder, like how did you guys decide to work together? And were you guys a good team? I think we were a good team. We took a big risk. My co-founder was my best friend and he's still my best friend. Yeah. And everything worked out. And as you know, with your co-founders, you build either an incredibly strong relationship or everything collapses and you don't talk to each other ever again. So it's one or the other. And in our case, it worked out. And I don't think we were that thoughtful when we decided to go and start this company. It's just that we had no options. And that's the beauty and the challenges on having no options is that when you're pressed into you have to do something, your creativity light bulb goes on and says, I need to do something. And that's why I'm super excited about the time we're living in right now, because I can talk to a lot of entrepreneurs and executives and people that are not even knowing what they want to do. And they can now think because they're not a lot of options and the market has shifted and continues to shift. So over the next 12 to 24 months, I anticipate we're going to see a lot of great entrepreneurs. It's similar to your story. I mean, you had the entrepreneur in you, but 2008, 2009 was a great time to start a company. Yeah. Because you could attract great talent to join. People didn't have a lot of options. So I believe we're going through a similar time right now. Well, I think that's exactly. So Cloudflare, we graduated from business school together and there were, I thank my lucky stars every day that Michelle, that Google didn't give her a full-time offer to go work for Google, because I think she probably would have gone and done that and we wouldn't have done this and our lives would be very, very different as a result. And I often think about who you start a company with and how fortunate I've been with Michelle and Lee. But the last company that I started before this, the three of us started it because we had had lockers next to each other in junior high, which is a terrible way to pick your co -founders. And we fought like crazy. And there was a four year period where we didn't speak and it was really ugly. So I think some of those early decisions are incredibly important. Now you've transitioned to being a VC, which I remember talking to you 10 years ago and I said, are you going to go be a VC? And you said, never. And so here you are. And when you look at teams, like what are some of the things, what are some of the hints that you have on whether a team is going to be successful and match really well, or whether they're going to end up not speaking to each other? I wish I had the answer to that. We triangulate a lot and we try to get our proxies to understand if things are going to work out. First of all, we try to understand the motivations and why are people doing what they're doing? And the first answer you typically get is, because I want to build a big company, because I want to be successful. But then you ask that same question, okay, what are you doing? Why are you doing what you're doing? You ask that same question 10 times and you get to the under layers of why they're doing what they're doing. And if they are starting a company because they are obsessed with a problem that they can't, I mean, they can't see the world with this problem and they know that this needs to be fixed, then people are going to work out these differences because the mission is much bigger. If you're just starting a company and the 10 times you ask the question, why are you doing what you're doing? They say, because I want to be an entrepreneur. That's probably a red flag because once things get tough, they're going to take that Google offer and say there are easier ways to make money and to be an entrepreneur with a lot more resources. So that is one. The second thing we do is we spend a lot of time not talking about the business, but just talking about life. And I know that sometimes you want to stay out of politics, but you talk about politics and religion, all those like tense conversations with the founding team and you get to see how they interact. Do they respect each other? Even they might come from different backgrounds and they might have different opinions because at the end of the day, you want them to respect each other and you want them to respect what they bring to the group because you want those complimentary teams rather than, oh, two or three founders who look exactly the same, same backgrounds. They're going to give you the same answers all the time. It's more about how do they resolve conflict. Now you keep saying we, and I assume when you say we, you mean Emergence Capital, which is the VC firm that you work for. And I often say, we got to know Emergence over the years and Gordon Ritter, your partner, I think is one of my favorite VCs that I've never taken money from. And you guys are a really unique group. But before talking about sort of the specifics of Emergence, I think there are a lot of people that think of VC sort of as this weird black box and don't quite know exactly what it is. And you somehow, you show up and you write checks to finance companies, but people don't really understand like what goes on behind the scenes. So, you know, start just starting with like, where do you get the money to invest in all of these companies and all these crazy ideas? Yeah, it's definitely not all our money. We couldn't do it ourselves. We have the trust of large endowments, foundations, pension funds, who need to make sure that they protect the assets they have so that they can advance their missions. And some endowments, school endowments, they want to make sure that they have the funds available to support fellowships and to support research. Foundations, they want to be able to fund initiatives like human rights and democracy and health. So it's a big responsibility, what we do. So those organizations allocate some of their capital to venture. In the case of Emergence, they allocate that to us. And what's great is that everyone's interests are aligned because the foundations, yeah, they want to keep on funding causes that matter to them. Those causes matter to us as well, and they matter to the entrepreneurs that are working hard. So at the end of the day, when entrepreneurs work incredibly hard, like you, Michelle and Lee did in the early days and now, and you take a company public and you generate all this value, you want to make sure that that value is going to make this world a better place beyond what you're doing as a company. That the money that you're generating doesn't just go into the pockets of wealthy individuals to make them wealthier, but it goes into foundations, endowments, and pension funds that are doing the things that you believe in. So that's... How does that work just, you know, practically for people who might not be as familiar with venture? So you've got a pension fund, like a teacher's pension fund, or, you know, that's accumulating capital and they've got a bunch of money. Do they just, do they call you up one day and is it like investing in a stock? Or how do you get the capital to go and invest in crazy ideas? So I'll rewind a little bit because even though I'm talking about this, like great pension funds and endowments and foundations, early on, when my partners raised the first fund, they took money from whoever would give them money. It's like, when you're starting a company, you can't afford to be that picky early on because there's not a lot of evidence. So it's almost like you need to beg and work incredibly hard for a very long time until you raise that capital. And it comes in small checks from people who believe in you rather than on what you're doing. And that's a big personal commitment. Over time, as you start showing some evidence that what you said you were going to do is working, then you can try to target bigger organizations who are not just going to look at you as an individual because they might not know you that well. And they look more at the metrics, same as you would do with a company. And so what we've been doing over the last 15 years is we've been collecting a list of causes that we care about. And then we looked at which of the organizations that are spending money for those causes and we reach out to them. Sometimes they reach out to us and we build relationships over many years until we make sure that things are aligned between what we want to do, what they want to do. And then when we raise a new fund, which we typically do every three to four years, we pick the organizations that we want to work with so that when our entrepreneurs are successful as you guys have been, then that money helps advance these causes. And what they do more tactically, they have these big endowments, these big pots of money that they've been collecting, and they have the responsibility to protect that money and make it grow over time. So they do approach the investment strategy with a more diversified approach, saying we want to do some public equities, and then they buy these public equities. We're going to do some real estate. They buy some real estate. We're going to do some private equities. And venture falls within that private equity category. Some of it is more later stage. Some of it is more venture capital. And then they allocate some capital and they pick the firms that they want to partner with. So every three to four years, we go out to the market and we tell them we're going to raise a new fund. We first go to our existing limited partners. That's the name that we that we use to call this investors. And we tell them how much you want to invest in the next fund. The next fund is going to be $400 million. And we add up all those allocations. When things are going well, you're oversubscribed. So people want to give you more than what you want to raise. And then you go back and tell them, thank you, we're honored that you want to do so much. But we're going to have to cut back a little bit because we want to make sure that we have a diversified group of LPs. And we want to make room for these two new investors that are doing great things in health care and education, because we believe in those causes as a team. So how, I mean, early on, and even now, the venture, like if you're investing as one of these pension funds, you're investing in real estate, you sort of understand how real estate is going to work. If you're investing in public equities or bonds, you can buy and sell those on a daily basis based on what's happening. When somebody makes an investment in Emergence and in you at Emergence, I mean, they're really betting. It's a long-term bet. It's a 10 -year investment. And one of the things that's always really impressed me about you guys is that you've had kind of a very clear thesis on where the world is going to go. And I assume that's what you're sort of talking to your investors about as part of sort of saying, here's how we think the world is going to emerge. What does that thesis look like today? What are the sorts of companies and ideas that you're excited about? When the firm got started 18 years ago, the thesis was that software was going to move from on-prem servers to the cloud. And that was revolutionary back then. And a lot of people said that's never going to happen. Who's going to move data to this like cloud thing, which wasn't even called cloud back then. You might remember the application service provider model. And now that's obvious. So even though we continue to focus on that category, we're always trying to figure out what's next. And we try to be very intentional about the areas that we spend time on. And right now we have three major themes that we're pretty excited about. One of them is what we call coaching networks. And that's the idea that every enterprise application is going to have a layer of intelligence that's going to make us humans better at what we do. So get rid of all the automation, get rid of all the processing that you have to do when you log into your CRM and you have to enter data and then update records and then pull a report and figure out what to do. That's something that technology and a layer of AI can do for you and tell you, Matthew, this is what you need to focus on right now. These are customers that matter. So don't spend time doing all this processing stuff. Just give these customers a call or send them an email because they typically respond better with emails. And that layer of intelligence is going to reinvent a lot of the cloud 1.0 applications. The second category is what we call industry cloud. And those are vertically focused applications. In the early days, you had to go super broad to be able to create a big company. Now that cloud is ubiquitous, you can go deep into categories and build an operating system, similarly to what Viva System did for life sciences. And the third one is the deskless workforce. And that's been accelerated with this pandemic because now people are not only working without a desk, but they're working without an office. And the requirements in terms of productivity apps changes. The way you manage security when people are accessing critical applications from their houses with the same Comcast connection that is being used by the kids to access YouTube videos, that creates vulnerabilities. And that's where companies like you can help a lot with that because you can go beyond the servers into the edge and you can protect users all the way through their journeys. So that's why I believe that what you guys are doing is going to get a turbo boost given how the world has shifted. And as we work on those three themes, we're also looking at what are the new emerging themes that come up. And as you know, we've been working with the Zoom team for a long time. And now we're seeing that on top of the Zoom platform, people are building single purpose applications. So they're building telemedicine companies that are leveraging video conferencing solutions. They're building learning, they're building interviewing. And those are all not just features, there are companies. Remember Viva was built on top of Salesforce, and they're now a $30 billion plus company. We believe that that's going to happen more and more as people leverage platforms, even like Cloudflare. Someone could build a company leveraging the Cloudflare platform to solve a very specific use case for a very defined set of users. And that could be a multi-billion dollar company. And they don't have to build the entire technology because you guys at Cloudflare have done an amazing job building that technology. You know, it's interesting. Again, I've always been impressed by you guys and how much you've learned from each of your experiences. I mean, Gordon built force .com for Salesforce, which then turned into the platform that Viva built. He then invested in Viva, which seemed like a home run until you invested in Zoom. And that seemed like an even bigger home run. Tell me a little bit about that story. How did you meet Eric and Zoom? Because that's catching lightning in a bottle. Yeah. And it's a combination of doing all the work and also getting lucky. It would be unfair to say, oh, we knew exactly how this was going to turn out. No, I mean, a lot of VCs would have said video conferencing, that's a dead space, right? No one's going to do anything in that. Yeah. And we make five to seven new investments a year. And when we make those investments, we have the same level of conviction that those companies are going to be the next Salesforce, Viva, Zoom. Sometimes it works out. Sometimes it doesn't. What I think was unique with Zoom was a combination of Eric, the COO and founder, having a deep domain expertise in the category. He came from WebEx, so he understood that this was a category that was not going away. And a lot of the incumbents were under-investing in their platform. The world shifted from being just web-enabled and laptop, desktop to mobile and mobile networks. And that creates a need that the old incumbents couldn't do. Second, I think we had the advantage of having talked to a lot of companies. By the time we talked to Zoom, we had talked to every other video conferencing out there. So we could see that what Zoom was doing was very different. And then our background being focused more global, my experience in Argentina, we tried every technology with people in Argentina and Zoom was the only one that worked. So when people said, oh, it's done, we don't need another one. Yeah, they were talking from their Palo Alto offices to someone in San Francisco and the networks are pretty good. But when you go from San Francisco to Buenos Aires, Argentina, I mean, you have to, you know it, you have to jump through a bit more hopes to get there. And that's where we saw that the product was different. And then Eric, he's a special leader. I mean, he didn't take any shortcuts. He wasn't trying to maximize short-term value. He wasn't trying to get publicity. He was just always focused on doing the right thing, focusing on the long-term goal. And he still does that, which is fascinating. The guy hasn't changed. He's the same person now as he was like eight years ago. Yeah. He's been one of the people that I've gotten to meet in this journey that I really value having gotten to know. He's just a very genuine, very, just a good guy. Someone that's easy to root for, which is fun in this. How did you get to know him? We came across the product first and we got obsessed with the product. So we reached out to him and we told him we're interested to potentially invest in the company. And his answer was, we don't need funding. We got turned down by everyone. So I'm not going to waste time with other VCs who are going to kick the tires. And at the end of the day, they're going to say, oh, it's done. There's no money to be made. The incumbents are going to win this space. Uh, so I took that as a challenge and you know, that people with this like immigrant approach, we don't take no for an answer. We just keep going. And we started building a relationship and I told him, look, okay, got it. Let let let's deploy zoom at emergence. We're talking to a lot of entrepreneurs outside of the Bay area. We're using this Skype camera, which doesn't work. So we want to shift to zoom and that got his attention and he helped us deploy zoom at emergence. And that's how everyone got exposed to, uh, to Eric and the product and how Eric got exposed to emergence. And then over time, we realized that we had the same goals. We wanted to build something big long-term and that friendship, that partnership turned into an investment. But overall, what I cherish today is more that partnership and friendship than the investment itself, even though the investment, you can measure the success of the investment. It's hard to measure the success of a partnership and friendship, but for us, that's the thing that we value the most. You know, what's, what's been incredible is that zoom, you know, has, has over the last three months grown as much as, as much as it has. And, and you're, you're, you're on the, you're on the board. So I don't want you to speak specifically about zoom, but are there lessons that you, that, that, that you have seen either, either there or at other companies that are things that companies can do to prepare for explosive growth? Like, like they've, like they've seen. And, and also, you know, a lot of the challenges like that, um, that have come up with, they come along with that explosive growth. Um, there are things you can do. Um, however, it's really tough to anticipate something as, as intense as what we've seen in the last few months. Um, so every company should do this kind of like war games and figure out what happens. And I start with a more traditional ones. What happens if these big competitors decide to drop their prices to zero to drive us out of, uh, of business? So you can start with a simpler and more predictable ones, and then get to the more esoteric ones. It's like, what happens if there's a global conflict or a war here and there, and Internet gets shut down completely? How are we going to work around that? And I'm sure you guys do it as well. Given your global presence, you need to be thinking about that. It's like, yeah, every day you need to make sure that you deliver value to your customers, that your team is engaged, that you have the best people on the team, but you rely on stuff that unfortunately you can't fully control as you become a global company and things could change. Yeah, we, so we've got about a minute left and, and the, the, the brutal brutalness of TV is that we, we have to, that we have to end kind of on time, but you know, you, you came from Argentina when you first moved to the U .S., you moved to Miami, not to Silicon Valley. What, what's your, what are you, are you looking for entrepreneurs that are outside of Silicon Valley? What's, as we all move to a more deskless work environment, where, where's the future of entrepreneurship? We're looking for entrepreneurs outside of the Bay Area, outside of the U.S. We believe that a lot of entrepreneurs outside of the Bay Area are going to have more insights into how this future of work is going to look like. I believe we're going to shift from 20% online, 80% in person. Santi, I really appreciate you, you taking time. We could, we could spend a lot of time talking about this. Thank you. Stay safe, wash your hands and, and if there's ever anything we can do to help, don't hesitate to reach out. Thank you very much, Matthew. And thank you Cloudflare team.